The price of a litre of petrol is influenced by a number of factors, including wholesale costs, delivery, supplier margins. However, the largest chunk of the price of petrol in the UK is made up of various taxes on the fuel.
Fuel duty alone makes up 34% of the price of a litre of petrol, while an extra 17% is made up of VAT.
That means that over half the price of a litre of petrol or diesel is just tax. One benefit of this is that surges in oil prices don’t directly translate into hikes on the forecourt.
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The levies mean motorists pay more than just the wholesale cost of the fuel and supplier margins, but the same taxes can protect from the worst of market swings when the price of oil changes.
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That is the case right now, as the war in Iran is continuing to push the price of oil up, creating a knock-on effect on the price of petrol and diesel.
While the price of oil has increased by around 38% since the beginning of the war on 28 February, up from around $0.45 or ($73 a barrel) to around $0.69 per litre ($100 a barrel) on 6 May, the price of a litre of petrol has increased much less than that.
Petrol prices have climbed by around 18% in that same time period, going from 133p a litre to 157p.
The high taxes on fuel also open the door for chancellor Rachel Reeves to help motorists amid rising fuel prices – groups like the TaxPayers' Alliance have urged her to cut taxes should the fuel crisis continue.
Petrol cost breakdown: What makes up the price of a litre of petrol?
The price of a litre of petrol is generally made up of around six different components, with the manufacturer, retailer, and government all taking a slice of the pie.
A chart showing how the price of a litre of petrol is determined can be found below.
Fuel duty (34%)
Fuel duty is the largest component of the price of a litre of petrol and diesel.
Fuel duty is a tax levied by the government on the consumption of fuel. You pay fuel duty on both petrol and diesel, but also on domestic heating fuel (although a reduced rate).
The rate of fuel duty has been frozen since 2010, and had a further 5p knocked off in March 2022 as a temporary measure, bringing it to 52.95p per litre. It will remain at this rate until September 2026, chancellor Rachel Reeves confirmed in the Autumn Budget.
Under current plans, the temporary 5p cut that was made in 2022 will be gradually reversed after September 2026, therefore increasing the cost at the pump.
Wholesale costs (34%)
The second-biggest component of the cost of a litre of petrol is its wholesale cost. The price of wholesale petrol is based on the price of raw materials including crude oil and refining costs.
The price you pay at the pump will increase or decrease with market movements, which can sometimes be very volatile.
VAT (17%)
VAT is a flat tax of 20% that applies to most consumer goods you buy in the UK, including petrol.
As fuel duty is included in the price of a litre of petrol and VAT is added afterwards, drivers end up paying tax on a tax. VAT represents 17% of the total value of a litre of petrol.
Retailer margin (11%)
This is the amount of money that retailers make every time they sell a litre of petrol.
Delivery and distribution (1%)
This is the cost of distributing and transporting petrol, and is passed onto drivers when they pay at the pump.
Biofuel content (6%)
This is the cost of making the fuel you buy more eco-friendly.
The breakdown for the price of a litre of diesel is broadly the same as that for petrol, but some components make up more of the price, and some less.
A pie chart showing the breakdown of a price of a litre of diesel can be found below.
How are petrol prices determined?
Though it is not the only factor, the main thing that determines the price of a litre of petrol is the price of oil as, without oil, you cannot have petrol.
To make petrol and diesel, the first step is for manufacturers to buy crude oil in the wholesale markets.
Due to its geopolitical importance, the oil market is especially sensitive to external shocks so the price of the commodity can be quite volatile – when there is a greater risk of extracting it, the price of oil will typically increase.
This is what we are currently seeing in the wake of the Iran war. Oil prices have shot up as there is increased risk in extracting oil in the Middle East and transporting it out.
In particular, Iran’s closure of the Strait of Hormuz, a narrow naval passageway between Iran and Oman through which around 20% of the world’s oil is transported, has crippled the global oil supply.
Another example can be seen in the immediate aftermath of Russia’s invasion of Ukraine when the safety of oil processing was threatened.
What is more, oil is typically traded on the global market in dollars, which means that if the dollar strengthens or the pound weakens, oil becomes more expensive for consumers here in the UK.
The AA’s fuel price spokesperson told MoneyWeek: “The influence of the exchange rate is often overlooked when drivers compare oil price movements with those at the pump. At the moment, it is critical. Oil and fuel on commodity markets are traded in dollars, which makes the weaker pound very bad news for motorists.”
Once manufacturers have the crude oil, they then need to transport it to their refinery. There, the crude oil is refined, distilled, purified, and then mixed with a number of other components to finally make the fuel you use in your car.
From ground to pump, making petrol is a long and complex process with a lot of different parties that want to make a profit, all influencing the price you pay.
On top of this, the government taxes petrol and diesel quite heavily, further increasing the price of fuel at the pump.
